Computer program product for selecting an investment portfolio based in part on socially responsible investing considerations

ABSTRACT

A computer program product is provided for selecting a recommended investment portfolio based in part on socially responsible considerations. A portfolio of securities is identified for potential inclusion in the recommended investment portfolio. Socially responsible investing (SRI) scores are provided for the identified securities, and the identified securities are ranked relative to each other based on their SRI scores in a computerized ranking engine. A processor receives an entry of initial weightings for each of the identified securities, or data by which initial weightings for each of the identified securities can be objectively calculated; the ranking of the identified securities based on their SRI scores; and an SRI multiplier algorithm that is correlated with the relative ranking. The initial weightings or the data are unadjusted by socially responsible considerations. The processor uses a weighting calculation engine to calculate adjusted weightings for the portfolio of securities using at least the entered items. Securities having higher ranked SRI scores relative to other securities receive greater weightings, and the weightings include non-binary weightings. The processor outputs the adjusted weightings for the portfolio of securities. The adjusted weightings are used to select the recommended investment portfolio based in part on socially responsible considerations.

CROSS-REFERENCE TO RELATED APPLICATIONS

This application is a continuation of copending U.S. application Ser. No. 12/261,535 filed Oct. 30, 2008, the entire disclosure of which is incorporated herein by reference.

BACKGROUND OF THE INVENTION

A growing number of people are looking for ways to align their investment choices with their personal philosophies about environmental sustainability and other social issues. Sustainability-concerned investors and socially conscious investors embrace the idea that everyone has a responsibility for the environment and social issues. Money managers are responding to this trend by incorporating environmental factors and social issues into their investment strategies. However, socially responsible investing (SRI) funds in the market today generally are designed to accumulate companies that pass a given screen, rather than to achieve specific investment goals. Accordingly, there is an unmet need for SRI funds that are focused on specific investment goals, while still addressing SRI concerns. The present invention fulfills such a need.

BRIEF SUMMARY OF THE INVENTION

A computer-implemented method is provided for selecting a recommended investment portfolio based in part on socially responsible considerations. A portfolio of securities is identified for potential inclusion in the recommended investment portfolio. Socially responsible investing (SRI) scores are provided for the identified securities, and the identified securities are ranked relative to each other based on their SRI scores in a computerized ranking engine. A processor receives an entry of initial weightings for each of the identified securities, or data by which initial weightings for each of the identified securities can be objectively calculated; the ranking of the identified securities based on their SRI scores; and an SRI multiplier algorithm that is correlated with the relative ranking. The initial weightings or the data are unadjusted by socially responsible considerations. The processor uses a weighting calculation engine to calculate adjusted weightings for the portfolio of securities using at least the entered items. Securities having higher ranked SRI scores relative to other securities receive greater weightings, and the weightings include non-binary weightings. The processor outputs the adjusted weightings for the portfolio of securities. The adjusted weightings are used to select the recommended investment portfolio based in part on socially responsible considerations. The recommended investment portfolio may also be used to manage an investment company that selects securities based in part on environmental impact considerations.

In another preferred embodiment, an investment company continuously manages its portfolio of securities based on the recommended investment portfolio.

BRIEF DESCRIPTION OF THE DRAWINGS

The foregoing summary, as well as the following detailed description of preferred embodiments of the invention, will be better understood when read in conjunction with the appended drawings. For the purpose of illustrating the invention, there is shown in the drawings embodiments which are presently preferred. However, the invention is not limited to the precise arrangements and instrumentalities shown.

In the drawings:

FIG. 1 is a schematic block diagram of a system that implements one preferred embodiment of the present invention.

FIG. 2 is an overview of an investment process used with the FIG. 1 system.

FIGS. 3A-3E, taken together, shows a spreadsheet of how a portfolio of securities is tilted towards sustainability-friendly companies in accordance with one preferred embodiment of the present invention.

FIG. 4A shows a graph of allocation vs. sustainable Z-score for providing a sustainability overlay in accordance with a preferred embodiment of the present invention.

FIGS. 4B-4H show comparisons between portfolios with sustainability overlays vs. portfolios without such overlays and industry sector allocations in accordance with a preferred embodiment of the present invention.

FIG. 5A shows environmental impact scores for a sample of securities.

FIG. 5B shows the meaning of certain subscore ratings that determine the environment impact scores shown in FIG. 5A.

DETAILED DESCRIPTION OF THE INVENTION

Certain terminology is used herein for convenience only and is not to be taken as a limitation on the present invention.

I. DEFINITIONS

The following definitions are provided to promote understanding of the present invention.

SRI score or sustainability score—The Socially Responsible Investing (SRI) score is a score assigned by a rating organization to a company, or derived from rating information obtained from a rating organization. The SRI score may be specific to a particular concern. One such SRI score related to environmental concerns is an environmental impact score, or EIS score. One preferred embodiment of the present invention uses EIS scores. SRI scores may also be specific to social issues or corporate governance, or combinations thereof, and such scores are within the scope of the present invention. The SRI score is also interchangeably referred to herein as a “sustainability score.” SRI multiplier—An SRI multiplier adjusts the weighting of a security for SRI issues. Sustainable Z-score—The sustainable Z-score (shown in FIG. 4A) is a mapping of the sector-by-sector market cap weighted SRI score, mapped into a normal distribution (a normal distribution with a mean of 0, and a standard deviation of 1). It is the method by which the raw company SRI scores are normalized and weighted by sector, and then assigned a relevant SRI multiplier. non-binary weightings—Non-binary weightings are weightings other than “1” and “0.” Weightings can be more or less than 1, and greater than “0.” Weightings can also be equal to “1” and “0.”

II. OVERVIEW OF PRESENT INVENTION

FIG. 1 is a schematic block diagram of a system 10 that implements one preferred embodiment of the present invention. The system includes a processor 12 and a portfolio trading and management computer 14. The processor 12 and computer 14 may be separate components or may be part of the same computer system. In one implementation, a recommended investment portfolio 16 is created and provided to customers/clients, but no actual trading of securities occurs. In another implementation, the processor 12 and computer 14 are part of an investment company, and actual trading of securities occurs by the investment company. In both instances, the recommended investment portfolio 16 is periodically generated.

The processor 12 includes an SRI ranking engine 18, an SRI multiplier algorithm 20 and a weighting calculation engine 22. The SRI ranking engine 18 receives an input of SRI scores (e.g., EIS scores) from a database of SRI scores 24, and a portfolio of securities identified for potential inclusion in the investment portfolio. Ideally, all of the securities would have such a score, but scores may not be available for some of the securities. The treatment of securities without scores is discussed below. The SRI ranking engine 18 ranks the identified securities that have scores relative to each other based on their scores. In the preferred embodiment, each of the securities are defined by an industry sector, and the ranking is performed on an industry sector basis. The weighting calculation engine 22 receives the output of the SRI multiplier algorithm 20 and an initial weighting for each of the securities in the portfolio of securities identified for potential inclusion in the investment portfolio, or data by which initial weightings for each of the securities in the portfolio of securities identified for potential inclusion in the investment portfolio can be objectively calculated. The initial weightings or the data are unadjusted by socially responsible considerations. Using this information, the weighting calculation engine 22 calculates adjusted weightings for the portfolio of securities. Securities having higher ranked SRI scores relative to other securities receive greater weightings.

The initial weightings are either (a) based on pre-set weights from an outside source (such as an index), equally weighted, or based on other predetermined criteria, or (b) objectively calculated using data which is input for each security. Examples of (b) include, but are not limited to:

1. Market capitalization

2. Market capitalization with free-float adjustment

3. Graduated weighting based on book-to-market ratio, price/earnings ratio, or other similar criteria

4. Other objective criteria by which initial weightings may be objectively calculated

The sustainability weighting feature provides for non-binary weightings. The weightings thus do not merely indicate inclusion or exclusion of the securities, although a weighting of zero (i.e., an exclusion) may be applied to selected securities. The weightings preferably provide adjusted weightings that exclude, underweight, and overweight securities based on the relative rankings. More specifically, the adjusted weightings preferably exclude a predefined bottom percentage of relatively ranked securities from the recommended investment portfolio, underweight a predefined low to mid-ranked percentage of relatively ranked securities from the recommended investment portfolio, and overweight a predefined mid to high-ranked percentage of relatively ranked securities from the recommended investment portfolio. Percentages can be calculated in a variety of ways, including cumulative market-cap, number of securities, or combinations of these and other factors. One suitable range of adjusted weightings, from the bottom to the top, are as follows, using cumulative market caps:

1. bottom 10% are excluded

2. next 15% are weighted at 0.50× initial weighting

3. next 15% are weighted at 0.80× initial weighting

4. next 20% are weighted at 1.125× initial weighting

5. next 15% are weighted at 1.25× initial weighting

6. next 15% are weighted at 1.40× initial weighting

7. top 10% are weighted at 1.80× initial weighting

As discussed above, the SRI scores may be retrieved by the processor 12 from a remote database 24 of such scores provided by a third party vendor/service provider. A neutral adjusted weighting may be assigned to any security that does not have an SRI score. This adjusted weighting would also preferably be made on an industry sector basis. In one preferred embodiment wherein the SRI score is an EIS score, the SRI (EIS) score is provided by Sustainable Holdings, Beverly Hills, Calif.

In an alternative embodiment of the present invention, an investment company uses the portfolio trading and management computer 14 to buy and sell securities so as to build and maintain a portfolio that closely matches the recommended investment portfolio 16. The computer 14 includes a comparison engine 26 and a trading processor 28. In operation, the process described above is periodically repeated with current SRI scores to generate a current recommended investment portfolio 16. The comparison engine 26 then compares the current recommended investment portfolio 16 with an existing investment portfolio and generates a buy/sell portfolio target list to bring the existing investment portfolio in line with the current recommended investment portfolio 16. The trading processor 28 then outputs suitable buy/sell trading instructions that are necessary to achieve that goal. A portfolio manager will then work with a broker/dealer to execute on the instructions. This process may still be performed even if the system 10 is used only for advising and not for operating an investment company. If so, then the buy/sell portfolio target list and the buy/sell instructions would be provided to the customers/clients who, in turn, would use them to decide whether to make the necessary trades for investment services that they provide to their own customers/clients.

To summarize, the process described above may be used for any of the following scenarios:

1. Create an initial recommended investment portfolio based on an inputted portfolio of securities and initial weightings (or data by which the initial weightings can be calculated, such as market-cap security weightings) for such securities. In this instance, there would be no existing investment portfolio. 2. Update an existing investment portfolio that was generated using the system. The updating may be for rebalancing (e.g., quarterly) or to adjust for actual and/or expected cash flows which can occur on a daily or less frequent basis (e.g., weekly). The current recommended investment portfolio 16 may then be compared to the previously generated investment portfolio to produce a buy/sell portfolio target list in the same manner as described above. A portfolio manager would decide when it is appropriate to perform such an update. 3. Create an SRI (e.g., sustainability) version of an existing portfolio. In one embodiment of this process, the inputted portfolio of securities and initial weightings for such securities would exactly match the holdings of the portfolio. When an update occurs, the newly inputted portfolio of securities and initial weightings would also exactly match the currently existing holdings of the portfolio. This approach allows the sustainability version to piggyback on the name recognition and investment goals of the non-sustainable portfolio.

FIG. 2 is a self-explanatory overview of an investment process 30. The apparatus for performing the security weighting algorithm process 32, buy and sell orders step 34, and trading system 36 of FIG. 2 are all shown in FIG. 1. FIG. 2 also shows various databases (company and security information database 38, accounts and holdings database 40, portfolio targets and constraints database 42) and sources of vendor data (security information 44, company information 46) for implementing the system of FIG. 1.

In all of the scenarios described above, a portfolio manager may also input constraints into the system, such as portfolio restrictions (e.g., ADR's, REIT's); minimum/maximum trade size, and target country weights for international strategies. Using these constraints, a software program then builds a database of all available securities that can be chosen for the portfolio.

Although not shown in FIG. 1, additional optimization variables may optionally be used to select the initial weightings (or the data by which initial weightings can be objectively calculated) inputted into the engine 22 or to revise the adjusted weightings outputted by the engine 22. In one scheme, the optimization variables are used to tilt the desired target portfolio towards small/value names. Such optimization variables include concentration factors for industry, countries, dividends, capital gains, ranges for overweighting, and in some cases, core multipliers. These variables are applied independent of the SRI factors and will all have an impact on the resultant portfolio.

The processor 12 and computer 14 may be any general-purpose computer, such as a personal computer (PC) that runs a Microsoft Windows® operating system or a mainframe computer running a UNIX-type operating system.

III. DETAILED DISCLOSURE

The present invention is described in the context of portfolio management services and investment companies commercially offered and managed by Dimensional Fund Advisors (DFA), Santa Monica, Calif. In the example below, the process is used to run the U.S. Sustainability Core 1 Portfolio and the International Sustainability Core 1 Portfolio. However, the scope of the present invention is not limited to this particular implementation of the invention. In the example below, core multipliers are different for sustainable vs. non-sustainable funds.

One preferred method of developing a U.S. Core portfolio is as follows:

Step 1: Start with a universe of securities.

Step 2: For each security, identify where the security fits in terms of size and value in the 5×5 multiplier grid below, e.g., largest, growthiest name would fall under row 1 and column 2. This security has a core multiplier of 0.45. For the smallest, deepest value name, the security falls under row 5, column 4, receiving a multiplier of 6.

Neg Low 2 3 High ND/Util 1 0.525 0.45 0.68 1.6 2 0.525 2 1 1 1.4 3 3.6 1 3 2.5 2 3.4 5.6 6 2.5 4 4 3 5.2 6 6 4 5 4.5 3 6 6 6 4.5 ND = no data Util = utilities Step 3: For each security, take the market cap (MCAP) of that security and multiply by the free-float factor for the security, and then multiply by the core multiplier determined in step 2 above. Step 4: If there are no country weight caps (discussed below), the last step is to weight each security based on the products determined in step 3. For example, the weight of each security is determined as follows: (security's MCAP×free-float×core multiplier)/sum of all products for all securities

In comparison, for a U.S. Sustainability Core, steps 1 and 2 of the Core portfolio are also performed, but the remaining steps differ as follows:

Step 3 (which can be done before step 2) involves ranking securities within their industry by their sustainability scores, and then assigning a sustainability multiplier to each security using cumulative market cap. A neutral multiplier of 1.125 is used for securities without sustainability scores. Step 4: Multiply for each security, MCAP× free-float× core multiplier× sustainability multiplier. Step 5: Weight each individual security by its ‘product’ from step 4, relative to the sum of products in step 4.

There are other screens that can be applied, such as momentum filters, in addition to the tilting algorithm. The core multiplier grid for the sustainability core may be the same or different than the core multiplier grid for the non-sustainability core. DFA uses different multiplier grids for these two cores. Also, although the example above uses core multipliers, the weighting could be as simple as just (MCAP× free-float), or even MCAP or equal weighting (prior to sustainability multipliers). Also, a different core multiplier grid is preferably used for the International core.

Appendix A below shows selected pages of the Prospectus for the U.S. Sustainability Core 1 Portfolio and the International Sustainability Core 1 Portfolio. Appendix B shows summary pages and top holdings for such portfolios and similar summary pages and top holdings for the corresponding DFA non-sustainability weighted portfolios.

FIGS. 3A-3E, taken together, show a spreadsheet of how a sample portfolio of securities is tilted towards sustainability-friendly companies in accordance with one preferred embodiment of the present invention. The spreadsheet only shows the first 245 companies by market cap from a full listing of 2876 companies. Companies are ranked, within their industries, by their SRI score. Then, the companies are assigned an SRI multiplier, depending on where they fall in the ranking. This multiplier can be zero (i.e., don't buy at all) or higher. Here, the SRI scores range from 0.36 to 2.46, and the SRI multiplier ranges from 0.0 to 1.8. The addition of all of the weightings in the scaled “core” weight column and the scaled sustainable weight columns for the full listing of 2876 companies are both each equal to 100%. The formulas for calculating the scaled “core” weight and the scaled “sustainable” weight are shown on FIG. 3A.

In cases where sustainable multipliers are based on ranges of cumulative market cap, certain companies will “cross over” the cumulative market cap for a break. Consider an example wherein the bottom 10% of companies, by market cap, are excluded. Most likely, there is some company that straddles the 10% threshold. In those cases, the SRI multiplier is determined by interpolation, so that the percentage of the company that falls within the residual bottom 10% gets a 0 weighting and the remainder of the company gets multiplied by the next sustainable multiplier. In some cases, the SRI score is “unavailable.” In these cases, a standard (usually neutral) weighting is assigned so that the security is not penalized or rewarded. Here, the neutral weighting is 1.125, which was determined by calculating how everything else worked out since the target percentages are determined by relative weighting.

FIG. 4A shows one suitable graph of allocation vs. sustainable Z-score for providing a sustainability overlay.

FIGS. 4B-4H show comparisons between portfolios with sustainability overlays vs. portfolios without such overlays and industry sector allocations.

FIG. 5A shows EEP scores at a particular point in time for a sample of U.S. securities having the 32 largest market capitalization. Each security receives an overall score from 0-3 based on a weighting of three subscores (not shown). The meaning of two of the subscores (environmental vulnerability and environmental strength) is shown in FIG. 5B. The overall scores can then be used to create a relative ranking. In FIG. 5A, a relative ranking by quintiles 1-5 is shown in the last column. Other relative rankings are within the scope of the present invention. For example, the relative ranking in the example discussed above with respect to FIGS. 1 and 2 is: bottom 10%, next 15%, next 15%, next 20%, next 15%, next 15%, and top 10%.

The systems and processes described above incorporate a scientifically-based sustainability scoring system into the portfolio selection process and allow for the operation of portfolios (e.g., mutual funds) that select securities based at least in part on such a scoring system. The scoring system recognizes the effect of actions and decisions made by companies in all industries, thereby providing a “shared responsibility” view. In the preferred embodiment described above, companies with the worst scores in their industry are excluded, companies with low scores in their industry are under-weighted, and companies with the best scores in their industry are overweighted. Also, the continuous nature of the ranking system provides a better job of targeting SRI issues than a binary (i.e., one-time non-weighted include/exclude) approach and also enhances diversification.

The recommended investment portfolio created by the processes described above may be used to define an index, in the same manner that a portfolio of securities and their weightings define the S&P Index or the Russell 1000 index. That is, the index consists of the securities in the recommended investment portfolio.

The examples provided above use an EIS score as the SRI score. However, as discussed above, SRI scores may also be specific to social issues or corporate governance, or combinations thereof, and processes that use such scores are within the scope of the present invention.

In another embodiment of the present invention, factors other than social issues, corporate governance or the environment that are of interest to investors may use the above-described process by replacing the SRI scores in the database 24 with “investment factor scores” created for the particular factor(s) of interest to the investors. The remaining steps of the process are identical to those described above.

The present invention may be implemented with any combination of hardware and software. If implemented as a computer-implemented apparatus, the present invention is implemented using means for performing all of the steps and functions described above.

The present invention can be included in an article of manufacture (e.g., one or more computer program products) having, for instance, computer useable media. The media has embodied therein, for instance, computer readable program code means for providing and facilitating the mechanisms of the present invention. The article of manufacture can be included as part of a computer system or sold separately.

It will be appreciated by those skilled in the art that changes could be made to the embodiments described above without departing from the broad inventive concept thereof. It is understood, therefore, that this invention is not limited to the particular embodiments disclosed, but it is intended to cover modifications within the spirit and scope of the present invention. 

What is claimed is:
 1. A computer program product for selecting a recommended investment portfolio based in part on socially responsible considerations, the computer program product comprising computer-readable media encoded with non-transitory tangible instructions for execution by a processor to perform a method comprising: (a) providing a portfolio of securities identified for potential inclusion in the recommended investment portfolio; (b) providing socially responsible investing (SRI) scores for the identified securities; (c) ranking the identified securities relative to each other based on their SRI scores in a computerized ranking engine; (d) entering into a processor: (i) initial weightings for each of the identified securities, or data by which initial weightings for each of the identified securities is objectively calculated, the initial weightings or the data being unadjusted by socially responsible considerations, (ii) the ranking of the identified securities based on their SRI scores, and (iii) an SRI multiplier algorithm that is correlated with the relative ranking; (e) calculating via the processor using a weighting engine, adjusted weightings for the portfolio of securities using at least the entered items (i)-(iii), wherein securities having higher ranked SRI scores relative to other securities receive greater weightings, and the weightings include non-binary weightings; (f) outputting via the processor, the adjusted weightings for the portfolio of securities; and (g) selecting the recommended investment portfolio based in part on socially responsible considerations using the adjusted weightings.
 2. The computer program product of claim 1 wherein the adjusted weightings exclude, underweight, and overweight securities based on the relative rankings.
 3. The computer program product of claim 2 wherein the adjusted weightings excludes a predefined bottom percentage of relatively ranked securities from the recommended investment portfolio, underweight a predefined low to mid-ranked percentage of relatively ranked securities from the recommended investment portfolio, and overweight a predefined mid to high-ranked percentage of relatively ranked securities from the recommended investment portfolio.
 4. The computer program product of claim 1 wherein the SRI scores are environmental impact scores.
 5. The computer program product of claim 1 wherein the instructions when executed by the processor perform a method further comprising: (h) defining an index based on the recommended investment portfolio, the index consisting of the securities in the recommended investment portfolio.
 6. The computer program product of claim 1 wherein each of the securities are defined by an industry sector, and the ranking and calculating of adjusted weightings is performed on an industry sector basis.
 7. The computer program product of claim 1 wherein step (c) further comprises the computerized ranking engine receiving the SRI scores from a database of such scores.
 8. The computer program product of claim 1 wherein the instructions when executed by the processor perform a method further comprising: (h) periodically repeating steps (a)-(g) with updated SRI scores to generate a current recommended investment portfolio; and (i) comparing via the processor, the current recommended investment portfolio with an existing investment portfolio and generating a buy/sell portfolio target list to bring the existing investment portfolio in line with the current recommended investment portfolio.
 9. A computer program product for selecting a recommended investment portfolio based in part on investment factor considerations, the computer program product comprising computer-readable media encoded with non-transitory tangible instructions for execution by a processor to perform a method comprising: (a) providing a portfolio of securities identified for potential inclusion in the recommended investment portfolio; (b) providing investment factor scores for the identified securities; (c) ranking the identified securities relative to each other based on their investment factor scores in a computerized ranking engine; (d) entering into a processor: (i) initial weightings for each of the identified securities, or data by which initial weightings for each of the identified securities is objectively calculated, the initial weightings or the data being unadjusted by investment factor considerations, (ii) the ranking of the identified securities based on their investment factor scores, and (iii) an investment factor multiplier algorithm that is correlated with the relative ranking; (e) calculating via the processor using a weighting engine, adjusted weightings for the portfolio of securities using at least the entered items (i)-(iii), wherein securities having higher ranked investment factor scores relative to other securities receive greater weightings, and the weightings include non-binary weightings; (f) outputting via the processor, the adjusted weightings for the portfolio of securities; and (g) selecting the recommended investment portfolio based in part on investment factor considerations using the adjusted weightings.
 10. The computer program product of claim 9 wherein the adjusted weightings exclude, underweight, and overweight securities based on the relative rankings.
 11. The computer program product of claim 10 wherein the adjusted weightings excludes a predefined bottom percentage of relatively ranked securities from the recommended investment portfolio, underweight a predefined low to mid-ranked percentage of relatively ranked securities from the recommended investment portfolio, and overweight a predefined mid to high-ranked percentage of relatively ranked securities from the recommended investment portfolio.
 12. The computer program product of claim 9 wherein the investment factor scores are socially responsible investing scores.
 13. The computer program product of claim 9 wherein the instructions when executed by the processor perform a method further comprising: (h) defining an index based on the recommended investment portfolio.
 14. The computer program product of claim 9 wherein each of the securities are defined by an industry sector, and the ranking and calculating of adjusted weightings is performed on an industry sector basis.
 15. The computer program product of claim 9 wherein step (c) further comprises the computerized ranking engine receiving the investment factor scores from a database of such scores.
 16. The computer program product of claim 9 wherein the instructions when executed by the processor perform a method further comprising: (h) periodically repeating steps (a)-(g) with updated investment factor scores to generate a current recommended investment portfolio; and (i) comparing via the processor, the current recommended investment portfolio with an existing investment portfolio and generating a buy/sell portfolio target list to bring the existing investment portfolio in line with the current recommended investment portfolio. 